Infrastructure projects need more private capital: DPM Tharman

Singapore is working to make it more attractive for institutional investors, such as pension funds, insurers and sovereign wealth funds, to invest in infrastructure projects such as roads and railways, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.These investors are constrained by factors such as a lack of clear performance indicators on infrastructure investments, and the perception that such projects are fraught with unquantifiable risks.Mr Tharman was speaking at the sixth annual World Bank-Singapore Infrastructure Finance Summit at the Shangri-La Hotel.Banks, which specialise in shorter-duration, higher-risk financing, play an important role in infrastructure funding especially in a project's early stages, he said.But bringing in institutional investors - which tend to prefer mature projects with stable cash flow - in subsequent stages can help ensure continuity and also allow banks to recycle their capital.The total size of global assets under management by institutional investors is estimated at US$57 trillion (S$79 trillion), of which only around 3 per cent is allocated to infrastructure, noted Mr Tharman, who is also the Coordinating Minister for Economic and Social Policies.An even smaller share - less than 0.2 per cent or about US$100 billion globally - is being allocated to infrastructure debt.Given the vast infrastructure opportunities available, more can be done to "crowd in" institutional investors, the minister said.

He pointed to three key focus areas for Singapore in helping to tackle this issue.First, investors often shy away from infrastructure projects because non-commercial risks are frequently left open-ended in contracts. More can be done to improve and standardise project documentation, he noted.

"(This means) sticking to consistent language in contracts that gives institutional investors the assurance that there are standards which will be maintained, so they don't have to treat each project as a bespoke opportunity with idiosyncratic risks."

Next, institutional investors have found it difficult to scale up their infrastructure exposure given a lack of data used to measure the performance and risks of such projects.

Lastly, there are still significant opportunities to develop infrastructure debt as a key asset class for institutional investors. The sector has been "greatly underweighted" partly as a result of the problems investors face in ramping up their infrastructure exposure, he said.

It is important that institutional investors view infrastructure as a key asset class, especially since financing conditions are expected to tighten in the medium term and banks will have to become more selective, he added.

World Bank managing director and chief financial officer Bertrand Badre, a panellist at yesterday's conference, agreed with Mr Tharman and noted that the issue is as much about transparency as it is about the availability of projects.

"You have to put yourself in the shoes of institutional investors, they have constraints... Infrastructure as an asset class is just a concept being discussed, which is not real yet. We have to give assurance to investors that it does exist."

Three initiatives
By Chia Yan Min, The Straits Times, 21 Oct 2015Singapore is working to develop infrastructure as an attractive asset class, and "crowd in" institutional investors. There are three initiatives where Singapore is actively seeking to make a difference.PROMOTING CONSISTENT PROJECT DOCUMENTATION TO REDUCE RISKInvestors often shy away from infrastructure projects because non-commercial risks are often left open-ended in contracts.Singapore is working with the World Bank to promote the adoption of standards and provisions in regional public-private partnership (PPP) projects that will help attract private investors.CREATING QUANTITATIVE MEASURES ON THE EXPECTED PERFORMANCE AND RISKS OF INFRASTRUCTURE ASSETSInstitutional investors have found it difficult to scale up their infrastructure exposure because of a lack of data that can be used to measure performance and risks of such projects.To this end, the Edhec Business School's research arm in Singapore will build on its fundamental research on infrastructure asset pricing to create performance benchmarks for long-term infrastructure debt and equity investments.DEVELOPING INFRASTRUCTURE DEBT AS A SIGNIFICANT ASSET CLASS FOR INSTITUTIONAL INVESTORSThere is an opportunity to promote more seamless transfer of infrastructure debt from banks (which specialise in shorter-duration, higher-risk financing early in a project's life cycle) to institutional investors (which tend to prefer mature projects with stable cash flows). The Monetary Authority of Singapore is consulting the industry on setting up an infrastructure debt takeout facility to ease the transfer of infrastructure debt from banks to institutional investors.